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Australia's booming aged population will hit the economy harder
than previously thought, halving economic growth in 20 years and
leaving governments with a $2200 billion budget hole over 40 years,
a new report warns.

The report, released today by the Productivity Commission,
predicts ageing will open a "fiscal gap" of 7 per cent of gross
domestic product for federal and state governments by 2045.

It predicts the average rate of economic growth per person will
dip to 1.25 per cent by the 2020s - half the current average.

"Economic growth will flag as the Australian workforce grows
more slowly than the population," the commission's chairman, Gary
Banks, said.

He said the gap was "large and will require action by all
governments".

The commission has canvassed increasing taxes to meet the budget
shortfall.

Its report builds on one released by the Treasurer, Peter
Costello, in 2002, which estimated ageing would create a federal
budget gap of 5 per cent of GDP in 40 years.

By 2045, one in four Australians, or 7 million, will be aged 65
or more, compared to 2.5 million now.

The Federal Government will bear the brunt of this shift mainly
due to soaring health costs, about a third of which will be due to
ageing. But the Productivity Commission says state and local
governments will bear their share. The provision of human services,
including for the elderly, accounts for around half of all local
government spending.

"There is likely to be an emerging fiscal deficit at the local
government level under current policy settings," the report
said.

The commission said the ageing of the population was not yet a
crisis, but would turn into one if governments did not take action
now.

"Population ageing can only be conceived of as a crisis if we
let it become one."

The report outlined two big challenges: improving productivity
to offset the dwindling supply of labour and making health services
more efficient.

It said increased immigration could not ward off the impact of a
shrinking workforce and boosting fertility rates was not a
realistic option.

"In the future, even more than in the past, productivity will be
the most important source of growth," Mr Banks said.

The commission predicted government health expenditure -
excluding aged care - would rise from 5.7 per cent of GDP to 10.8
per cent in 2044-45.

Last month the commission put itself at odds with the Prime
Minister, John Howard, by urging a national review of the health
system, including transfer of responsibility for health to the
Federal Government.

The commission's report is based on projections of existing
government polices and people's current behaviour.

"They are now forecasts in the sense that they are expected to
occur," the commission said. "The projections could be accurate
only if government chose to do nothing."

Mr Costello, who ordered the commission's report, said Australia
was already leading the world on the ageing problem.

"The Government's warnings of the need to act now to prevent a
long-term fiscal crisis have been endorsed by the commission," he
said.

"Another notable aspect of the draft report was that contrary to
state government claims, most of the rising fiscal pressure will be
borne by the Commonwealth."

Mr Costello sparked the debate on Australia's demographic
challenges when he released his Intergenerational report. In
February he introduced superannuation changes to encourage workers
to remain in the workforce longer.

Mr Banks said ageing would have pervasive effects, but the issue
needed to be kept in perspective. "Average household incomes will
have nearly doubled in 40 years' time ... that said, the looming
fiscal gap is large and will require action by all
governments."